Economist, Telegraph Columnist, Broadcaster

Rugged Backdrop Of Jackson Hole Suits Yellen’s Tough Talk

The end of summer, for economists at least, is marked by the Jackson Hole symposium. This annual central banker summit, set in the picturesque Wyoming mountain resort, is generally of interest only to faceless financial investors and policy wonks. This weekend’s gabfest, though, is likely to attract more attention.

One reason is that this could be the last hurrah for Janet Yellen. The diminutive Federal Reserve boss, the only woman ever to hold this vital post, could soon be replaced. Her first term expires in February – and President Trump could decide not to reappoint her.

In my view, Yellen has done a pretty good job. The Fed is alone among the world’s major central banks in terms of raising interest rates from the ultra-low emergency levels that have prevailed for almost a decade since the sub-prime collapse. The US central bank has increased rates three times since last December and, while weighing on mortgage-holders, this incremental monetary tightening helps far more numerous savers.

By signaling at least the start of a return to normality, higher rates are a net economic positive. And, with the US growing by a reasonably buoyant 1.5pc in 2016, and set for a 2pc expansion this year and next, there is just no excuse not to put rates up.

The extent to which financial markets hang on the words of central bankers is, of course, ludicrous. But because everyone else is watching so closely, investors have no choice but to react. If Yellen sounds remotely more likely to back another rate rise soon, the dollar will rise, with equities probably falling. She has lately sounded ‘hawkish’, with the minutes from the Fed’s latest meeting on monetary policy noting that ‘the vulnerabilities caused by asset valuations are now elevated’.

If the Fed doesn’t tighten soon, then, over-juiced asset markets could crash. That’s why I believe Yellen will signal more rises, while vowing to start unwinding the Fed’s vast $5,400bn balance sheet – as she begins the reversal of that other post-Lehman emergency measure, so-called ‘quantitative easing’.

This time last year, I thought Yellen lacked the guts to raise rates. But she has – and good on her. For the most part, Trump has backed these rises, mindful that QE has gone way too far and many of his core voters are small-time savers sick and tired of negative real returns.

Yet Yellen is now at loggerheads with the President when it comes to ‘financial stability’ – the main subject she’ll address this weekend. Trump was elected on a ticket of ‘not sucking up to Wall Street like Hillary’. In office, though, he is backing a major deregulation package, spearheaded by Treasury Secretary and ex Goldman Sachs banker Steve Mnuchin.

The thrust of the Mnuchin initiative is to reverse much of what remains of the ‘macro-prudential’ measures introduced to stop another 2008-style market meltdown. The Goldman team in the White House want to scale back capital requirements and limitations to leverage and proprietary trading – moves that will be lauded by Wall Street, while making financial markets more crash-prone. Yellen – again, to her credit – has pushed back, pointing out the dangers.

We could soon see Trump remove Yellen, only to replace her as the world’s top financial policy-maker with a man from Goldman Sachs, due to her protesting a set of irresponsible market-boosting measures imposed by another man from Goldman Sachs. Not a good look. As such, this Yellen-Trump stand-off could yet get beyond the business sections and onto the front pages. Expect Yellen, then, to toughen up her ‘financial stability’ rhetoric this weekend, using the Wyoming mountains as a suitably rugged backdrop.

The Fed supremo, though, could yet be upstaged by Mario Draghi. The boss of the European Central Bank will speak at Jackson Hole for the first time since 2014. In the past, Draghi has been able to argue for more monetary stimulus to foster growth, given that the eurozone has been moribund.

Now the 19-member currency bloc is expanding at something close to 2pc, ‘Super Mario’ has no excuse but to rein in his own version of QE – even if that growth is so uneven the Italian economy remains 10pc smaller than it was in 2008, with poor Greece still locked in a depression longer and deeper than that which upended America in the 1930s.

In July 2012, Draghi famously committed to do ‘whatever it takes’ to hold the single currency together. Since then, the ECB has dowsed Eurozone bonds market with QE liquidity when required, a commitment vital in preventing the ill-designed currency union from falling apart completely.

The common impression that the ECB began QE later than the other major central banks and has used it far less is mistaken. It is true that Draghi’s official QE programme was launched only in January 2015, years after the Fed and Bank of England. Yet for a long time before that, the ECB’s balance sheet saw rapid expansion via a complex mechanism for settling payments between the central banks of individual Eurozone members known, rather euphemistically, as TARGET2.

Explicit Eurozone QE was delayed so as not to aggravate vociferous German opposition. On the latest figures, though, via overt and covert means, the ECB’s balance sheet grew three-fold between mid-2008 and April 2017 – from the equivalent of $1,500bn to over $5,000bn, a similar size to that of the Fed and, in terms of Eurozone GDP, even bigger. Now, ahead of German elections next month, Draghi is under intense pressure from Berlin to cork his monetary bazooka. This weekend, then, he might want to scare the living daylights out of eurozone bond markets by threatening his own QE reversal, if only to keep irate German politicos at bay.